Depreciation Disallowance Under Section 80-IA Deleted, Interest Subsidy Treated Capital and Issue Remanded to AO

ITAT Ahmedabad allowed the assessee's appeal. It held that once deduction u/s 80-IA had already been allowed to the eligible undertaking, any further disallowance of depreciation relating to that undertaking would only enhance eligible profits and thus confer no revenue benefit; the disallowance was therefore deleted and the addition set aside. On the issue of interest subsidy under the Technology Upgradation Fund Scheme, following coordinate bench precedent, ITAT treated the subsidy as prima facie capital in nature, admitted the additional ground, and remanded the matter to the AO for fresh adjudication on quantum and factual verification. Additional grounds in reassessment were held admissible and allowed for statistical purposes.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether depreciation claimed in the accounts as per the Companies Act, but not as per the Income-tax Act, could be disallowed in computing business income when the profits of the same eligible undertaking are fully deductible under section 80-IA.

1.2 Whether an additional ground claiming that interest subsidy received under the Technology Upgradation Fund Scheme (TUFS) is a non-taxable capital receipt, and seeking corresponding reduction from total income and book profit, can be raised and entertained at the appellate stage in a reassessment appeal, and if so, whether the matter should be remanded to the Assessing Officer for fresh adjudication.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Disallowance of depreciation claimed as per Companies Act in respect of an undertaking eligible under section 80-IA

(a) Legal framework (as discussed)

2.1 The assessment was framed under sections 143(3) read with 147. The dispute concerned depreciation claimed in the profit and loss account of the power division as per the Companies Act, vis-à-vis depreciation allowable under the Income-tax Act, and the impact on the quantum of deduction under section 80-IA.

2.2 In the original assessment under section 143(3), the Assessing Officer had denied the entire claim of deduction under section 80-IA. Subsequently, the Tribunal, in an earlier appeal for the same year, allowed the assessee's claim for deduction under section 80-IA.

(b) Interpretation and reasoning

2.3 The Assessing Officer noticed that the assessee computed profits of the eligible power undertaking for section 80-IA after reducing depreciation of Rs. 79,24,946/- as per the Companies Act, without adding it back in the computation and re-claiming depreciation as per the Income-tax Act. He therefore disallowed the Companies Act depreciation and added it to the total income, on the footing that only depreciation as per the Income-tax Act is allowable.

2.4 The Commissioner (Appeals) held that depreciation has to be governed by the specific provisions of the Income-tax Act and prevails over the Companies Act for tax computation, and therefore upheld the disallowance, allowing the ground only partly.

2.5 The Tribunal noted that: (i) the disallowance under section 80-IA made in the original assessment has already been reversed and the deduction under section 80-IA has been allowed by the Tribunal in an earlier order; and (ii) the depreciation in dispute pertains to the same eligible undertaking whose entire profits are deductible under section 80-IA.

2.6 The Tribunal reasoned that, in such circumstances, even if the disputed depreciation is disallowed, this would only increase the profits of the eligible undertaking, and the increased profits would qualify for deduction under section 80-IA. Consequently, the disallowance would not yield any effective tax advantage to the Revenue in these facts.

2.7 Proceeding on the assumption "even if, but without admitting" that such disallowance of depreciation were correct on merits, the Tribunal held that any such adjustment merely increases the quantum of eligible profits and therefore the quantum of deduction under section 80-IA, neutralising the tax effect.

(c) Conclusions

2.8 The Tribunal set aside the order of the Commissioner (Appeals) on this issue and directed the Assessing Officer to delete the addition of Rs. 79,24,946/- representing disallowed depreciation.

2.9 The assessee's ground on this issue was allowed.

Issue 2 - Additional ground regarding TUFS interest subsidy as capital receipt and its admissibility in reassessment appeal

(a) Legal framework (as discussed)

2.10 The assessee, by way of additional grounds, claimed that interest subsidy of Rs. 3,96,42,334/- received under the Technology Upgradation Fund Scheme (TUFS) is in the nature of capital receipt, not chargeable to tax, and sought (i) reduction of total income, and (ii) reduction of book profits under section 115JB by the same amount.

2.11 The Tribunal referred to its earlier coordinate bench decision in a case involving TUFS interest subsidy, where:

- Additional grounds were admitted to raise a legal claim before the Tribunal, with reference to the powers under section 253 and the principles laid down in decisions including Goetze (India) Ltd. v. CIT and NTPC v. CIT.

- It was held that a cross-objection or an appeal before the Tribunal has "all the trappings of an appeal" and there is no bar on raising pure legal claims by way of additional grounds when relevant facts are already on record.

2.12 In that earlier decision, the Tribunal had also discussed the nature of TUFS interest subsidy, referring to Supreme Court decisions in CIT v. Chaphalkar Brothers, CIT v. Meghalaya Steels Ltd., and a High Court decision in CIT v. Sham Lal Bansal, as well as the later insertion of section 2(24)(xviii) by Finance Act, 2015 w.e.f. assessment year 2016-17, to indicate legislative recognition of certain subsidies as income from that date.

2.13 The Tribunal in the present case further considered the decision of the Karnataka High Court in Karnataka State Co-operative Apex Bank Ltd. v. DCIT, which held that where there is only an intimation under section 143(1), and reassessment proceedings are initiated under section 148, the reassessment effectively becomes the first regular assessment, and all claims of the assessee can be considered; even if section 143(1) intimation is treated as an order, the reassessment proceedings efface the earlier proceedings and the Assessing Officer is required to consider the matter de novo. The High Court distinguished the Supreme Court's decision in CIT v. Sun Engineering Works (P.) Ltd. as inapplicable in such a situation.

2.14 It was noted that the Karnataka High Court judgment has been appealed to the Supreme Court, but there is no stay of its operation.

(b) Interpretation and reasoning

2.15 On the preliminary objection of the Revenue, based on Sun Engineering Works, to the admissibility of the additional ground in a reassessment appeal, the Tribunal applied the reasoning of the Karnataka High Court that in a reassessment following only an intimation under section 143(1), the Assessing Officer is to consider the assessment de novo and can consider all claims; consequently, the assessee can seek relief through additional grounds before the Tribunal as well.

2.16 Relying on the coordinate bench decision dealing with TUFS subsidy and the powers of the Tribunal to entertain additional legal grounds, the Tribunal held that there is no impediment to admitting the assessee's additional grounds, especially where the issue is purely legal and necessary facts are already on record, and admission would enable correct assessment of the tax liability.

2.17 On the nature of the TUFS interest subsidy, the Tribunal reproduced and relied on the coordinate bench decision which had, in light of the above-noted Supreme Court and High Court judgments and the subsequent insertion of section 2(24)(xviii), accepted the principle that such interest subsidy, having regard to the object and purpose of the scheme (incentivising investment and technology upgradation), is in the nature of a capital receipt and not chargeable to tax for years prior to the effective date of section 2(24)(xviii), subject to verification of facts and quantum.

2.18 At the same time, the Tribunal recognised that in the present appeal the Revenue authorities had no prior occasion to examine the detailed factual aspects of the subsidy, including quantum and supporting documentation. Hence, consistent with the earlier coordinate bench approach, it considered it appropriate to remit the matter to the Assessing Officer for factual verification and fresh decision in accordance with law.

(c) Conclusions

2.19 The additional grounds relating to TUFS interest subsidy being capital receipt, and consequent reduction of total income and book profit, were admitted.

2.20 The issue raised in the additional grounds was set aside to the file of the Assessing Officer for fresh adjudication as per law, in the light of the coordinate bench decision on TUFS subsidy and subject to verification of facts and quantum.

2.21 The additional grounds were allowed for statistical purposes.

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